The Impact of Corporate Social Responsibility on Firm ...

[Pages:17]MANAGEMENT SCIENCE

Vol. 59, No. 5, May 2013, pp. 1045?1061 ISSN 0025-1909 (print) ISSN 1526-5501 (online)

? 2013 INFORMS

The Impact of Corporate Social Responsibility on Firm Value: The Role of Customer Awareness

Henri Servaes

London Business School, London NW1 4SA, United Kingdom, hservaes@london.edu

Ane Tamayo

London School of Economics and Political Science, London WC2A 2AE, United Kingdom, a.m.tamayo@lse.ac.uk

This paper shows that corporate social responsibility (CSR) and firm value are positively related for firms with high customer awareness, as proxied by advertising expenditures. For firms with low customer awareness, the relation is either negative or insignificant. In addition, we find that the effect of awareness on the CSR?value relation is reversed for firms with a poor prior reputation as corporate citizens. This evidence is consistent with the view that CSR activities can add value to the firm but only under certain conditions.

Key words: corporate social responsibiliy; firm value; customer awareness; reputation History: Received September 21, 2009; accepted June 13, 2012, by Bruno Cassiman, business strategy.

Published online in Articles in Advance January 8, 2013.

1. Introduction

Corporate social responsibility (CSR) has become an integral part of business practice over the last decade or so. In fact, many corporations dedicate a section of their annual reports and corporate websites to CSR activities, illustrating the importance they attach to such activities. But do such activities create value for the firm's shareholders or do they focus too much on other stakeholders, thereby lowering firm value? Despite much research on the topic (for reviews of the literature, see Griffin and Mahon 1997, Orlitzky 2001, Orlitzky et al. 2003, Margolis and Walsh 2003, Margolis et al. 2009), few firm conclusions can be drawn, except that the literature is divided. Although there appears to be more support for the view that CSR activities are positively related to profitability and firm value, a large number of studies find the opposite relation. As a result, the normative implications of research on corporate social responsibility are still uncertain.

The relation between CSR activities and firm value is unclear partly because of methodological concerns (Margolis and Walsh 2001) and, in particular, model misspecification. Even more important is, perhaps, the lack of understanding about the channels through which CSR affects firm value. Most theoretical models assume a direct link between CSR and firm value. In this paper, we propose an indirect link. In particular, we rely on Barnett's (2007) insight that the impact of CSR on firm value depends on the ability of CSR to influence stakeholders in the firm. We focus on one of the key stakeholders, consumers, and suggest that

a necessary condition for CSR to modify consumer behavior and, hence, affect firm value, is consumer awareness of firm CSR activities. Moreover, we argue that consumers are less likely to respond to CSR activities, even if they are aware of them, if the CSR activities are not aligned with the firm's reputation as a responsible citizen (see also Du et al. 2010, Schuler and Cording 2006).

In this paper, we revisit the relation between CSR and firm value, taking into account the concerns mentioned above. Using models with firm fixed effects to address model misspecification problems, we examine whether and under what conditions CSR can add value to the firm. More specifically, we study whether CSR activities are more value enhancing if they are conducted by firms with more consumer awareness. Although the relation between CSR and firm value ought not to be confined to the consumer channel, consumers constitute a natural starting point to uncover such a relation, given that their purchasing behavior clearly affects a company's financial performance and, ultimately, firm value. We also investigate whether the impact of awareness is attenuated for firms with a poor prior reputation for responsible behavior, and contrast the consumer awareness story with an alternative in which CSR is employed by socially conscious entrepreneurs who wish to signal product quality.

In our analyses, we employ the KLD Stats database over the period 1991?2005, which covers CSR activities of a large subset of U.S. companies, and combine it with financial statement data obtained

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from Compustat. Our main performance metric is Tobin's q, which is the market value of the firm, divided by the replacement value of the assets. We start by assessing whether firms with high consumer awareness, as proxied by advertising spending, can enhance firm value by increasing CSR, and find this to be the case. CSR activities have a negligible or negative impact on firm value for firms with low advertising intensity, which suggests that for these firms the costs sometimes outweigh the benefits. Conversely, we find a positive impact for firms with high advertising intensity. However, we show that the positive impact of advertising intensity reverses for firms with a poor prior reputation for being responsible citizens, as measured by Fortune's rating on the list of "America's Most Admired Companies." Interestingly, we find no evidence of a direct link between CSR and firm value after controlling for unobservable time-invariant firm characteristics (i.e., in models that employ firm fixed effects).

This paper contributes to the debate on the role of CSR in corporate strategy. We show that in certain circumstances CSR enhances the value of the firm, but in others, it could destroy value, suggesting that some firms adhere to the shareholder model, and others may consider broader objectives (see Jensen 2001). Our analyses also illustrate the importance of controlling for omitted variables in this type of study and highlight the complexity of the mechanism through which CSR affects firm value. By empirically establishing one condition under which such a relation can be uncovered, our research validates Schuler and Cording's (2006) and Barnett's (2007) claim that understanding the link between CSR and value requires models of stakeholder behavior that explain how CSR activities enhance/destroy value.

The remainder of this paper is organized as follows. In ?2, we define CSR and briefly summarize the literature on the impact of CSR activities on firm value; we also discuss various reasons why advertising spending may enhance/moderate the relation between CSR and firm value. Section 3 describes our data collection procedure and variable construction. Our results are contained in ?4. Section 5 concludes the paper, discusses the managerial implications of our findings, and proposes several avenues for further research.

2. CSR, Advertising Intensity, and Firm Value

2.1. Defining CSR Before discussing ways in which CSR activities can enhance firm value, it is important to discuss those activities that encompass CSR. Notwithstanding the large literature on the topic, a general consensus as to what activities are included under the CSR umbrella

has not emerged. In fact, Baron (2001, p. 10) argued that "Corporate social responsibility is an ill- and incompletely defined concept." We rely on the broad definition proposed by the World Business Council for Sustainable Development (WBCSD 2004), which argued that "CSR is the commitment of a business to contribute to sustainable economic development, working with employees, their families, the local community and society at large to improve their quality of life."1

This definition includes the elements that are generally included in empirical work on CSR, such as the community, the environment, human rights, and the treatment of employees. Whereas some of these elements relate to social dimensions, others focus on stakeholders (e.g., treatment of employees). As such, this definition is consistent with Griffin and Mahon's (1997) multidimensional notion of CSR and with the work of Dahlsrud (2008), who reviewed various definitions of CSR and found that the stakeholder and the social dimensions receive exactly the same attention based on frequency counts in Google searches.

The inclusion of stakeholders within the remit of CSR is, however, not without controversy, especially given that the boundary between stakeholder management and CSR is not clear cut. For example, Jensen (2001) argued that anyone who can potentially benefit from its engagement with the firm is a stakeholder. That would include issues related to human rights, the environment, and the community, elements that others would consider more "social." This definition of stakeholder is similar in spirit to Freeman's (1984, p. 53) definition of a stakeholder as "any group or individual who can affect or is affected by the achievement of an organization's purpose," although Freeman (1984) explicitly considered groups and individuals that can be negatively affected by the firm's actions as well. According to this view, all CSR activities fall under the remit of stakeholder management. On the other hand, Harrison et al. (2010) made a clear distinction between stakeholder orientation versus a focus on social issues and considered only the latter activities as CSR.

In sum, although there are some dissenting opinions, much of the literature includes both the social and stakeholder dimensions in the CSR remit. Thus, consistent with this view and our definition, we consider both facets of CSR in our work.

1 WBCSD is a CEO-led organization focused on organizing the global business community to create a sustainable future for business, society, and the environment. It has 200 member companies with combined revenues of over $7 trillion and, according to Google Scholar, it has large visibility in academic research (over 45,000 citations).

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2.2. Customer Awareness and CSR There is a substantial theoretical literature suggesting that CSR activities can enhance profitability and, hence, the value of the firm. Berman et al. (1999) provided an excellent overview of the various elements of CSR and the ways in which these activities can increase firm value.2 The concern, of course, is that CSR activities are costly and that the costs do not (always) outweigh the benefits. In fact, empirical studies on the relation between the value of the firm and CSR activities find mixed results, including an impressive number of studies reporting a negative relation (see Griffin and Mahon 1997; for a differing view, see Roman et al. 1999).

Our goal is to examine under which circumstances CSR involvement may be beneficial. We focus on the customer channel and examine the effect of a potential moderating variable, advertising intensity, on the CSR?firm value relation. We posit that through advertising a firm reduces the information gap between itself and its customers, which, in turn, makes it more likely that customers will find out about the firm's CSR involvement, and reward the firm for its CSR efforts.

In developing our prediction that advertising intensity enhances the benefits of CSR, we turn to the literature in strategy, marketing, and business ethics, which has established two facts. First, customers take into consideration firms' CSR activities when making purchase decisions (see, for example, Brown and Dacin 1997, Creyer and Ross 1997, Sen and Bhattacharya 2001, Bhattacharya and Sen 2004, Penn Schoen Berland 2010). Some of this research suggests that consumers are willing to pay a higher price for products of firms with more CSR engagement; other work suggests that, although consumers are not willing to pay a higher price, they will more likely purchase goods from firms that are more socially responsible. These findings support Baron's (2001) original insight that "a practice labelled as socially responsible increases the demand for its (the firm's) product. This strategic CSR is simply a profit-maximizing strategy motivated by selfinterest " (p. 9). In this context, CSR is considered a product attribute, and therefore a strategic investment chosen to maximize firm value. The second fact is that consumers are often not aware of a firm's CSR activities (see, for example, Sen and Bhattacharya 2001, Bhattacharya and Sen 2004, Pomering and Dolnicar 2009, Du et al. 2010).

There is a clear disconnect between these two facts. As articulated by Bhattacharya and Sen (2004) and

2 See also Bies et al. (2007) and the other papers in the special topic forum on "Corporations as Social Change Agents," published in the Academy of Management Review, Volume 32, 2007.

Schuler and Cording (2006), the lack of customers' awareness about CSR initiatives is a major limiting factor in their ability to respond to these initiatives. Similarly, McWilliams and Siegel (2001) argued that potential customers must be fully aware of CSR characteristics for CSR differentiation to be successful; they also predicted a positive correlation between advertising intensity and the provision of CSR.3 All of these authors recommended that companies work on increasing CSR awareness levels, if CSR is to be a profitable strategic investment.4 This work also suggests that not all firms fully appreciate the importance of customer awareness when evaluating CSR as a strategic investment.

In this paper, we posit that advertising enhances a firm's information environment, thereby increasing the firm's (potential) customers' awareness about the firm and likely prompting them to become further informed about the firm, its products, and practices, including its corporate social performance. The notion that advertising provides information about the firm goes back at least to Nelson (1974) (see also Bagwell 2007 for a review of the literature). More recently, relating advertising to CSR, McWilliams and Siegel (2000, 2001) suggested that CSR-related advertising and media coverage may increase consumer awareness of CSR. This, in turn, increases the demand for socially responsible behavior and the returns to engaging in such behavior. They did not, however, formally model or test this conjecture.

All these arguments lead to our main prediction that the impact of CSR activities on the value of the firm will be positively related to advertising intensity. We note that this prediction does not imply that firms need to advertise their CSR activities (as suggested by McWilliams and Siegel 2000, 2001); all that is required is that advertising intensity leads to increased awareness of the firm, including its CSR activities.

Our prediction differs from the predictions derived from Schuler and Cording's (2006) model. Schuler and Cording (2006) also argued that information intensity is one of the key elements in the CSR?value relation. Their argument relies on the dissemination of CSR information by the firm or other parties. This could happen through advertising, but it is likely that most advertising does not directly speak to the firm's CSR activities. Moreover, Schuler and Cording's (2006) argument would only apply to firms with particular

3 See also Brammer and Millington (2008), who estimated a model of the relation between charitable giving and advertising intensity (and a number of other variables).

4 As early as 1975, Stone (1975) pointed out more generally that for markets to exhibit some degree of control over corporate social performance, information must be available to stakeholders about the firm's social practices.

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CSR strengths; firms with CSR concerns would certainly not include negative information about their CSR performance in their advertising. Our argument, on the other hand, applies to both strengths and concerns--as firms increase advertising and public awareness, customers are more likely to find out about all elements of CSR.

Schuler and Cording (2006) developed some predictions regarding the alignment between a firm's CSR information and its prior reputation, which are consistent with our argument. In particular, they argued that the intensity of positive CSR information is stronger for firms with a good prior reputation than for firms with a poor prior reputation; if there is no congruency between a firm's current actions and its past reputation, customers will not respond positively to the CSR information. This required consistency is also explored by Barnett (2007), who argued that the response to CSR activities by customers is path dependent; the same activity may lead to positive returns for one firm, but negative returns for another depending on the customers' priors about the firm's intentions. Du et al. (2010), likewise, conjectured that a good prior reputation amplifies the positive effect of CSR communication. Thus, we also explore in our analyses whether a firm's prior reputation affects the strength of the impact of advertising on the CSR?value relation.

In sum, prior literature suggests that CSR is a product attribute valued by consumers, which they can only appreciate if they are informed about it. Advertising spending increases public awareness about the firm and prompts customers to become more informed about the firm's CSR activities. This increased scrutiny benefits companies with CSR strengths, but harms companies with CSR concerns. In addition, customers attach less value to the CSR attribute if the firm has a poor prior reputation. Next, we consider a different explanation for why advertising may affect the CSR?value relation, and explain how our tests differentiate between the arguments proposed in this section and the next.

2.3. CSR as a Signal of Product Quality Fisman et al. (2008) suggested that CSR activities are more beneficial in more competitive industries with high advertising intensity. Their implication was derived from a simple model of corporate philanthropy in which firms use CSR activities as a mechanism to signal product quality. In their model, not all the attributes of product quality are observable to the customer. Therefore, firms that are purely profit oriented have an incentive to produce products of lower quality. That is not the case for all firms, however. In their model, some firms also care about product quality externalities (because the owners of the firms care

about social welfare). Subject to this (self-imposed) constraint on product quality, these firms also attempt to maximize profits. These firms engage in CSR to signal their orientation toward higher quality products. Consumers realize that only firms that care about product quality are willing to invest in CSR activities because profit-oriented firms find these investments "too expensive." As a result, by engaging in CSR, firms are able to identify themselves as having better quality products.

Fisman et al. (2008) argued that such CSR activities are more beneficial in competitive industries and in industries where there is more opportunity to signal quality. They employed industry advertising intensity, measured as industry-median advertising to sales, as a proxy for the ability to signal quality.

Empirically, a critical distinction between the Fisman et al. (2008) prediction and our prediction rests on the measurement of advertising intensity. According to Fisman et al. (2008), what matters is industry advertising intensity, whereas our prediction regarding customer awareness is about firm advertising intensity. This distinction is important--industry advertising in the Fisman et al. (2008) model measures signalling ability, not awareness. Another important distinction is that the Fisman et al. (2008) model is about positive CSR efforts, not about weaknesses, whereas our argument applies equally to strengths and weaknesses. Thus, their model predicts a nonlinear relation between performance and the CSR? advertising interaction: positive for CSR strengths, but no relation for CSR weaknesses.

The empirical work of Fisman et al. (2008) supports their "signalling" over the "consumer awareness" argument. They found that CSR activities enhance the value of the firm in industries with high advertising intensity. They also found that the benefits of CSR are more substantial in more competitive industries; when there is more competition, it is more important to signal product quality. Consistent with the Fisman et al. (2008) argument, Fernandez-Kranz and Santal? (2010) showed that firms in more competitive industries are more likely to engage in CSR, and Siegel and Vitaliano (2007) showed that firms selling experience goods (for which determining product quality is more difficult) have higher CSR involvement. However, these authors did not study the relation between CSR and firm value. Moreover, the fact that firms in more competitive industries are more likely to engage in CSR is not inconsistent with the consumer awareness argument--CSR may be a way of product differentiation if CSR itself is considered a product attribute (see also Baron 2001).

One limitation of the Fisman et al. (2008) empirical analysis is that they focused only on two CSR

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activities: charitable contributions and housing support. Because CSR is multidimensional, it is important to re-examine the empirical evidence on the "signalling" and the "consumer awareness" arguments using a more comprehensive definition of CSR activities. Furthermore, their empirical analysis does not shed light on the effect of advertising on the relation between performance and CSR concerns.

3. Data and Variable Construction

In this study, we combine two databases. To measure CSR activities, we employ the KLD Stats database constructed by KLD Research and Analytics, Inc. (KLD). KLD is a Boston-based investment research firm specializing in tracking firms' CSR activities. Since 1991, this firm has gathered data on various CSR strengths and weaknesses for a large subset of U.S. companies. These data have been employed in a large number of previous studies (see, for example, Waddock and Graves 1997, Berman et al. 1999, Johnson and Greening 1999, Hillman and Keim 2001). We employ the KLD data over the period 1991?2005.

Over time, KLD's coverage has expanded considerably. For the period 1991?2000, the data set covers all firms in the S&P 500 Index and the Domini 400 Social Index. This second index is developed by KLD to capture the performance of firms that have positive social and environmental records, but that also meet certain financial standards.5 For 2001 and 2002, KLD adds firms from the Russell 1000 Index (approximately the largest 1,000 companies in the United States based on market capitalization) to its coverage, and for 2003 through 2005, firms from the Russell 2000 (the 2,000 companies that follow the Russell 1000 in market capitalization) are also added.

Given that firms in the Domini 400 Social Index have good CSR records and may have also performed better, their inclusion in our sample could lead to a selection bias. Therefore, we remove from our sample those firms that are part of the Domini 400 Social Index but are not included in the S&P 500 (1991?2005) or the Russell 1000 (2001?2005) or the Russell 2000 (2003?2005).

KLD divides CSR activities into 13 categories: community, diversity, employment, environment, human rights, product, alcohol, gaming, firearms, military, nuclear, tobacco, and corporate governance. We do not believe that corporate governance should be considered part of CSR. Generally, corporate governance is about the mechanisms that allow the principals (shareholders) to reward and exert control on the agents (the managers). For example, in their

5 KLD does not disclose the exact methodology used in the construction of this index.

widely cited survey paper on corporate governance, Shleifer and Vishny (1997, p. 737) state, "Corporate governance deals with the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment." CSR, on the other hand, deals with social objectives and stakeholders other than shareholders. Hence, we leave corporate governance out of our CSR measure. In our primary, conservative measure of CSR, we also remove the product and industry categories. The product category focuses on issues such as product quality, safety, and innovation. The inclusion of such a category under the CSR umbrella would indicate that firms with high quality products are firms with good CSR. This may be casting the net too wide. Similarly, industry characteristics are not necessarily elements of CSR. However, because firms can elect not to be involved with certain products, we also present results for a broader measure of CSR that includes both the industry and product elements of KLD.

For each of the categories considered, KLD Stats contains data on the number of strengths and concerns. For example, in 2005, there are seven possible strengths in the community category and four possible concerns. The number of strengths and concerns in each category has evolved over time as KLD refined the database. For instance, in 1990, there were only four possible community strengths as well as four concerns. As a result, it is not possible to directly compare strengths or concerns within a category across years. However, such a comparison is essential for our work because we are interested in both the time-series and the cross-sectional dimensions of CSR activities. We therefore scale the strengths and concerns for each firm year to obtain two indices that range from 0 to 1. To achieve this, we divide the number of strengths (concerns) for each firm year within each CSR category by the maximum possible number of strengths (concerns) in each category year. We then subtract the concerns index from the strengths index to obtain a measure of net CSR involvement in each area that ranges from -1 to +1 for each year.6 To construct our narrow, more conservative measure of CSR, we combine community, diversity, employees, environment, and human rights into one overall net CSR measure that ranges from -5 to +5.7 To construct our broader measure, we add the product category,

6 For example, in 1995, Exxon Mobil has strengths in three areas of the community category out of a maximum of seven, giving it a strengths score of 0.43 3/7 . In the same year, Exxon Mobil has concerns in two out of four areas of the community category, giving it a concerns score of 0.50 2/4 . Thus, Exxon Mobil's net CSR score in 1995 in the community area is -0 07 0 43 - 0 50 .

7 In robustness tests reported in ?4.4, we show that strengths and weaknesses have no differential impact on firm valuation, which justifies the computation of a net score.

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and we create a further CSR category called industry, which is the sum of all industry concerns, divided by six, as there are six possible industry concerns. Thus, the maximum of our broader measure is 6, and the minimum is -7 (there are no industry strengths, only concerns).

Accounting data employed to compute performance are obtained from the Compustat database, which contains financial accounting data for all listed U.S. companies. We merge the nonfinancial firms from the Compustat database with the KLD Stats database to obtain the sample employed in this paper. For firms with fiscal year end in December, we merge the KLD Stats data with financial accounting data for the same year, so that CSR activities and performance are measured concurrently. For firms with fiscal year end prior to December, we merge KLD Stats data with Compustat data for the following year to make sure that the CSR data precede the performance data. As such, we are more certain that causality goes from CSR to performance, and not vice versa.

The number of observations in our sample obtained after merging the Compustat and KLD Stats databases, and removing firms only contained in the Domini 400 Social Index (but not S&P 500 or Russell 1000/2000 firms), remains fairly stable around 400 from 1991 until 2000, and grows substantially to more than 2,000 firms in 2005 as KLD Stats coverage expands.

To measure performance, we employ Tobin's q, which is the market value of the firm, divided by the replacement value of its assets. Tobin's q has been used widely in economics, finance, and strategy as a performance measure (see, for example, Morck et al. 1988, Waddock and Graves 1997). It captures how much value the firm creates with its asset base. Because value is based on the present value of future expected cash flows, discounted at the required rate of return, it is already adjusted for risk. We compute Tobin's q as (book value of assets - book value of equity-deferred taxes+market value of equity)/book value of assets. The advantage of using Tobin's q over profitability is that profitability is a short-term measure, whereas Tobin's q is a long-term measure because it is based on the market value of the firm. In fact, it is possible that a firm deliberately sacrifices some current profitability to engage in CSR activities that are in the long-term interest of the firm. However, in our robustness section, we also present results using profitability as a measure of performance. To avoid problems with outliers, we winsorize Tobin's q at the 1st and 99th percentiles.8

Panel A of Table 1 contains summary statistics on the measures of CSR employed in our analyses, as well as Tobin's q, and the control variables employed in our regression models (discussed in ?4.2). All three measures of CSR actually have a negative score, on average. When all areas of CSR are combined, the lowest score in the sample is -2 33 (Texaco Corp in 1992) and the highest score is 2.14 (Polaroid in 1995). Averaged across years, the lowest score is -1 65 (Unisys) and the highest score is 1.23 (Polaroid) (untabulated). The average firm in our sample has assets of $7.6 billion and spends 1.32% of its sales on advertising.

Panel B of Table 1 contains the correlation matrix of our dependent and explanatory variables. None of the correlations are large, except for the ones between the various CSR measures.

4. Results

4.1. Does Advertising Increase Awareness of CSR Activities?

Our argument that CSR enhances the value of firms with higher customer awareness about the firm relies on advertising being a good proxy for awareness. In this section, we examine whether this assumption is justified. To determine whether advertising is related to firm and CSR information, we select a random subsample of 100 firms from our main sample and search the Factiva database (in particular, major U.S. news and business publications) for general press mentions and for mentions of CSR or related activities. We then estimate the following linear regression model:

number of (CSR) press cites

=f (advertising intensity, total assets, year dummies)

We control for firm size because we expect larger firms to receive more press attention. The coefficient on advertising intensity in the model for all press cites is 3,596, with a p-value of 0.00. (These results are untabulated for the sake of brevity.) In the model where we employ CSR press cites, the coefficient on advertising intensity is 11.15 with a p-value of 0.05. The effects are even stronger when we lag advertising by one year; the coefficient on all press cites increases to 7,095 (p-value of 0.01) and the coefficient on CSR press cites increases to 16.7 (p-value of 0.07). These results indicate that firms that advertise more receive more press coverage, suggesting that advertising enhances awareness about the company.9

8 Removing the outliers instead of winsorizing them does not affect our findings. These results are available from the authors upon request.

9 We also verify that the increased awareness due to media attention need not be driven by positive CSR information. To do this, we estimate separate regressions of CSR media cites on our measure of

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Table 1 Summary Statistics and Correlation Matrix

Panel A. Summary statistics

Variable

Mean

Median

Standard deviation

Min

Max

CSR (conservative) CSR (with industry) CSR (with industry and product) Tobin's q Total assets ($ millions) Advertising intensity R&D intensity

-0 0792 -0 0954 -0 1394

2 10 7,609 0 0132 0 0432

0 00 -0 05 -0 1071

1 63 1,922

0 0 0187

0 3787 0 3828 0 4739 1 42 25,715 0 0307 0 0878

-2 25 -2 25 -2 33

0 69 10 0 0

1 94 1 90 2 14 12 81 750,507 0 2861 0 7821

Panel B. Correlation matrix

Variable

Tobin's q

CSR (conservative)

CSR (with industry)

CSR (with industry and product)

Assets

Advertising/sales

CSR (conservative) CSR (with industry) CSR (with industry and product) Total assets Advertising intensity R&D intensity

0 152 0 160 0 161 -0 082 0 145 0 298

0 992 0 913 0 044 0 149 0 041

0 927 0 023 0 143 0 051

-0 098 0 109 0 070

0 018 -0 055

-0 0318

Notes. The CSR measure for each element of CSR, except for industry, is computed by taking the number of strengths and dividing it by the possible maximum, and subtracting the number of concerns, divided by the possible maximum, implying that the score on each element ranges from -1 to +1. The total is the sum of all the constituent elements. For industry, we add up the number of industry concerns and divide by its maximum (6). The conservative measure is computed as the sum of five elements: community, diversity, employees, environment, and human rights. To obtain the CSR measure including industry, we subtract the industry score from the conservative measure. To obtain the CSR measure including industry and product, we add the product score to the CSR measure including industry. Tobin's q is computed as (book value of assets - book value of equity - deferred taxes + market value of equity)/book value of assets. Advertising intensity is computed as advertising expenses/sales. When advertising expenses are missing on Compustat, we set it equal to zero. R&D intensity is computed as R&D expenses / sales. When R&D expenses are missing on Compustat, we set it equal to zero.

4.2. Advertising Intensity and the Value of CSR Activities

In this section, we examine our main hypothesis, which is that awareness, as proxied by advertising intensity, enhances the impact of CSR on firm value. As we argued previously, customers of advertising intensive firms are more likely to become aware of the firms' CSR activities and, hence, respond to them. We estimate panel regressions of Tobin's q as a function of CSR involvement and an interaction term between the CSR measure and advertising intensity.

Consistent with the literature (see Morck et al. 1988, McWilliams and Siegel 2000), we also include three control variables: size, advertising intensity, and research and development (R&D) intensity. Larger firms tend to be older and have lower investment opportunities than younger firms, which will translate in lower q ratios. We measure size as the log of the book value of assets. Advertising expenditures may create brand capital, which will be reflected in

CSR and CSR media cites on the absolute value of our CSR measure. Although we find no relation between CSR media cites and our measure of CSR, we find a positive and statistically significant coefficient (1.54, with a p-value of 0.03) for the regression using the absolute value of our CSR measure. This evidence indicates firms with more CSR strengths, but also those with more CSR concerns, receive more media attention.

the market value of the firm, but not in its book value. We compute advertising intensity as advertising expenditures divided by sales. Advertising expenditures are missing for more than 50% of the firms on Compustat. Given that advertising expenditures do not have to be disclosed if they are immaterial, we follow the literature and set it equal to zero when missing (see, for example, Fee et al. 2009, Hale and Santos 2009, Masulis et al. 2009).10 Research and development expenditures are generally not capitalized on the balance sheet; instead, they are expensed. However, they may create value for the firm, which will be reflected in a higher q ratio. We compute R&D intensity as research and development expenditures divided by sales. To avoid problems with outliers, we winsorize advertising intensity and R&D intensity at the 99th percentile (the first percentile is zero).

We estimate our regression models using ordinary least squares (OLS). However, because the same firm can enter the regression multiple times, we cluster the standard errors by firm to address the lack of independence of the observations (Rogers 1993). All standard errors are also corrected for heteroscedasticity (White 1980) and all models include year dummies.

10 As shown later in the paper, our results are robust to different ways of treating observations with missing advertising expenditures.

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Table 2 Panel Regressions of Tobin's q as a Function of CSR Involvement, and the CSR?Advertising Interaction

CSR measure

(i) Conservative

(ii) Include industry

concerns

(iii) Include industry

and product

(iv) Conservative

(v) Include industry

concerns

(vi) Include industry

and product

Intercept Log assets Advertising intensity R&D intensity CSR CSR Advertising intensity

Year dummies Firm fixed effects Adjusted R2 N

4 17 (0.00) -0 23 (0.00)

5 83 (0.00) 3 76 (0.00) 0 41 (0.00) 6 19 (0.05)

Yes No 0.19 10,712

4 15 (0.00) -0 22 (0.00)

6 00 (0.00) 3 75 (0.00) 0 39 (0.00) 6 65 (0.02)

Yes No 0.19 10,712

4 02 (0.00) -0 21 (0.00)

6 59 (0.00) 3 81 (0.00) 0 31 (0.00) 4 25 (0.08)

Yes No 0.19 10,712

6 38 (0.00) -0 50 (0.00) -1 25 (0.46) -0 64 (0.34) -0 07 (0.23)

7 70 (0.00)

Yes Yes 0.74 10,712

6 38 (0.00) -0 50 (0.00) -1 15 (0.49) -0 62 (0.24) -0 08 (0.24)

7 42 (0.01)

Yes Yes 0.74 10,712

6 37 (0.00) -0 50 (0.00) -0 82 (0.59) -0 63 (0.17) -0 01 (0.78)

4 94 (0.00)

Yes Yes 0.73 10,712

Notes. The model is estimated using OLS. The standard errors have been adjusted for heteroscedasticity and for the lack of independence of observations for the same firm (clustered standard errors). The conservative measure of CSR includes the following five KLD categories: community, diversity, employees, environment, and human rights. The p-values are reported in parentheses.

, , and indicate significance of the coefficient at the 1%, 5%, and 10% levels, respectively.

We employ three measures of CSR: the conservative measure, which includes five KLD categories (community, diversity, employees, environment, human rights); an expanded measure, which also includes industry concerns; and the broadest measure, which includes industry concerns and the product category. For each measure, we report two specifications: the first specification is estimated without firm fixed effects, as in most of the prior literature on CSR; the second specification is estimated with the inclusion of firm fixed effects, which control for time-invariant unobservable firm characteristics that may drive both valuation and CSR involvement. The omission of such controls may result in spurious findings and may explain why regression models with different sets of explanatory variables have yielded contradictory results in prior work.

Our results are reported in Table 2. Two results stand out. First, in the models estimated without firm fixed effects (models (i)?(iii)), we find a positive relation between the CSR measure and firm value. This finding holds for all measures of CSR and appears to suggest that CSR itself is value creating. However, in models estimated with firm fixed effects (models (iv)?(vi)), evidence of a direct relation between CSR and value disappears, suggesting that this finding is spurious and that controlling for unobservable firm characteristics is important in these specifications. In fact, the coefficient on CSR is negative in all specifications, although not statistically significant. Second, the interaction between advertising intensity and the CSR measure is significantly positive. Thus, firms benefit from CSR if they advertise. Comparing the coefficients on the CSR measure and the interaction indicates that the joint effect becomes positive for firms with advertising to sales above 0.91% (based on model (iv)), a criterion met by 28% of the

sample firms.11 The effect of advertising intensity on the CSR?value relation is also economically significant. For example, based on model (iv), for firms with zero advertising (the median of the distribution), increasing the CSR measure by one standard deviation (0.38) leads to a decrease in Tobin's q of 0.03. For firms with advertising expenditures to sales of 3.07% (one standard deviation above the median), the same increase in the CSR measure leads to an increase in Tobins's q of 0.06. The overall effect implies a difference in Tobins's q of 0.09, which is substantial given the mean Tobins's q ratio of 2.10.12

One concern with models that include firm fixed effects is that they may lack power to detect a relation. If most of the variability in the explanatory variables is cross-sectional, and there is little time-series variation, the inclusion of firm fixed effects essentially removes all the interesting variation that needs to be explained. Thus, if company CSR activities vary little over time, it may not be surprising that a firm fixed effects model shows no relation between CSR involvement and value. To address this concern, we first compute how much time-series variation there is in CSR involvement for the average firm. That is, for each firm, we compute the standard deviation of their CSR involvement over time, and we then average this measure across firms. The average of these standard deviations is 0.15 and the median is 0.14. This suggests that there is substantial time-series variability

11 The coefficient on the CSR score is -0 07, and the coefficient on the interaction between the CSR score and advertising intensity is 7.70. The break-even value of advertising intensity is therefore computed as 0 07/7 70 = 0 91%.

12 Because we employ a firm fixed effects model, the relative magnitude for each firm depends on the firm-specific mean Tobin's q, which ranges from 0.81 to 8.79.

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